The actual implications of a Capital Gains Tax

I’ve been banging the drum on this issue a bit recently, but what we’re not being told about National’s recent criticism of Labour on taxes is that they don’t actually just hate a CGT because it’s a tax, even though their loathing for taxes they themselves don’t raise, (remember, they took in huge amounts of extra tax by raising GST) is well-known. Let’s set aside for a minute Labour’s position on one, and focus on what the Greens want to do, so that we can talk about an actual CGT rather than about political uncertainty, which I promise to come back to at the end.

Now, the reason National dislike a CGT is because the upper echelons of the Party is full to the brim with people who make money off speculation, which a country with a CGT still allows, but doesn’t privilege as a loophole around income taxes. To them, this tax is economic policy that hurts their preferred method of making money, and equalizes a playing field that they have enjoyed seeing as tilted to those with sufficient capital to make money off capital gains.

The Greens want a comprehensive capital gains tax on real realized gains1, with an exemption for the family home2, which means you will never be forced to sell an asset because it becomes more valuable, in fact, taxes will only ever be paid if the owner of an asset makes a profit (after considering inflation) when they choose to sell. There is only a very small class of people for whom this would impact their day-to-day income, and thus their ability to “go shopping,” and that is people who live primarily off speculation in assets, a profession we should want to wipe out. If they’re professional investors, we want their income to be based on dividends, a financial reward for investing your capital in the productive economy. That sort of virtuous cycle is why we call our economic system “capitalism,” whatever your wider critiques of it. (and I have many)

What this will do in addition to collecting revenue is reduce the value of houses, farms, and other assets that are being bought for speculative purposes3. This might seem like a bad thing for property owners, however it really isn’t. If you buy and sell two properties in the same market, (eg. two farms in Canterbury) for the same value, you’ll likely be no better or worse off for the tax. (the sellers in each transaction will account for the tax in their asking price, but those prices will be depressed by more than the tax adjustment due to the lack of speculative demand) You might get hit badly if the CGT policy has been more effective in deflating prices in the area you want to sell than in the area you want to buy, but it’s not going to be implemented in isolation. A CGT together with a crackdown on investments to launder money, a government program to build thousands of affordable houses, and rule changes that genuinely incentivise people building and buying houses to that are occupied, should all act to depress house prices in all the overheated markets, while leaving the reasonably priced markets, such as the regions, roughly the same.

This might seem like a bad thing for business owners, who might one day want to sell their interest in a business, but it really isn’t. Why, you say? Not every business owner who sells will want to buy new assets for a new business afterwards, so it’s not like the tax balances out somehow. Instead, the benefit comes before the point of transaction, in terms of the availability of capital. Because speculative investments that allow for quick profit will now be taxed, productive investments in businesses of all sizes will become much more attractive. This means that investors will likely to be very happy to sink capital into your venture on a long-term basis, so long as they can expect periodic dividends. This will make starting ventures easier, seeking capital injections to expand easier, and, ironically enough, put local ventures on a more equal ground to ones with overseas owners, because they will have competing local capital. Even without re-investing a cent, this will stimulate the economy. And even though businesses founded before the CGT was implemented will have had to get capital the hard way in comparison, they’ll have an incumbent advantage in the marketplace, and they can always leverage the newly available capital to expand, too.

Now, onto Labour’s handling of tax uncertainty. It is fair to critique Jacinda Ardern’s statement that labour has been transparent about what it wants to do with the tax reform side of housing policy, and whether that would involve a capital gains tax that could apply to farm- and business sales. She has been clear, but she hasn’t been transparent. A transparent party would have told us what option they provisionally favour before going to the working group. However, that doesn’t mean that Bill English is being fair to her in saying she has to have numbers on such a proposal if it’s really just a sense of what option Labour favours going in to the working group. The whole point of having experts advise you is to listen to their opinions on the numbers, so if you’re genuinely going in to a reform process open to expert advice, the numbers in your starting proposal aren’t definite in the first place. If English were really sincerely critiquing her position as either a policy maker or an economist, he would know this. His crocodile tears on taxes affecting “hard-working kiwis” are nonsense. None of his economic or tax policy is sufficiently aimed at kiwis on or below the average wage.

In addition, as I’ve said above, the only people who need numbers on a CGT to know if they can go buy groceries are professional speculators. Your average waged employee won’t ever be taxed under the Greens’ proposal, and Labour is very likely to implement the same safeguards against unfairness in a CGT, but these average workers might well benefit from it in terms of being able to buy a house more easily, or being able to find a job more easily in a new business, or even being able to get capital to start their own business more easily, something every bit as much a kiwi dream for some people as owning a house.

So when you vote, ask yourself: what kind of economy do you want, and who’s got the policies to support it? Because if you want an economy dominated by big corporate farms where the actual workers are largely paid wages by overseas owners, overseas companies who can afford to set up businesses in a capital-poor environment, and people sitting on untenanted property portfolio or serially renovating houses, then you should probably re-elect the government. But if you want a diversified economy with a growing tech sector, fueled by renewable energy and maybe even some high-quality manufacturing jobs, and responsible mining that restores the environment after its done so we can keep making electronics, then you should vote to change the government. Because there’s more to voting for the economy than just finding the person who sounds most economically literate.

It’s quite possible to know what’s going on in the economy and still be captured by the interests of the current winners in the economy, like the government, or even be captured by irrational fears4 that immigration hurts the economy, like New Zealand First, but we should look at what the likely effects of economic policy would be, and also for the two long-standing governing parties, National and Labour, we should look at their record on economic indicators5. Those things both make it clear that only a progressive government, with the Greens moderating Labour’s policies to make them more about ordinary people and to commit them to a CGT or similarly effective policy to reform our economy, will deliver real economic prosperity decades into the future.

1 “Real realized gains” might seem like a repetition, but what it means is that the tax only applies on selling an asset, (“realizing” your gain) and that the taxed amount is inflation-adjusted, so you don’t get taxed for the whole economy becoming more expensive, just the extra value your asset gained relative to the economy as a whole. Another way to say this is “inflation-adjusted capital gains on asset sales,” but boy is that a mouthful. Thus the invention of jargon specific to each field.

2 Which means this is a tax that will never hit most New Zealanders. Probably the easiest way to get hit with it would be to buy some shares on the stockmarket at a low price, and sell them at a high price. I actually think structuring the exemption as simply on the family home is too complicated a rule, (there are a lot of potential loopholes to close, like do all unmarried people over eighteen owning a home pay no tax if they sell it? What if wealthy people “give” homes to their adult children for tax purposes? etc… If not, how do you define a “family?”) and we should instead exempt the first, say, $20,000 of capital gains every year, or some other arbitrary figure, and let you bring forward the exemptions for a reasonable number of years into the future. (if we set that period at four years with a $20k exemption, even the average profit from selling a house would incur no capital gains tax, as it’s $70k before removing inflation) That way, when you make a profit switching houses you’re actually living in, if you’re not living off other capital gains, you can just promise away those future tax exemptions, and nobody has to make rules about what counts or does not count as a “family home.” Easy and fair for everyone, all you need to do is periodically adjust the exemption amount to account for inflation, and it also means that you can fairly set the tax rate for capital gain quite high, too.

3 It’s not a magic bullet for reducing property prices, as there’s still the problem of money-launderers buying property to be dealt with, which is another pressure that’s driving property prices upwards, and it won’t be deterred with tax because the point of buying assets with dirty money is to get rid of the money and get something useful, not to make the full profit from it.

4 I mention economic fear of immigration here as irrational because even viewed through a purely economic lens, (which is not all there is to immigration, it’s also about honouring the spirit of the Treaty, and welcoming people who want to join our society, and being inclusive, and open to new people and new experiences, and cultural exchange) migrants are a good thing for the country. The only downside of migration is that it requires infrastructure to keep up with both the population growth and economic growth it brings, which means more pressure on housing and transport if the government ignores that requirement, as National has been doing in order to deliver tax cuts to the wealthiest New Zealanders.

5 For those who are curious, probably the clearest example is in tracking overall national debt. There is a strong correlation between Labour governments and paying down debt, and a strong correlation between National governments and increasing it. This trend gets stronger the longer a government has been in office, meaning it can’t be explained away by Labour “benefitting” from the aftereffects National’s “economic management.” In fact, quite the reverse- National borrows to offset the disastrous effects of its poorly-conceived economic policies, so that voters get a “good feeling” about them at first. About the only thing National does well economically is pushing the balance of trade a bit further in our favour, however this tends to be because they’ve been stronger on subsidizing industries that can’t compete without subsidies, in short, they’ve been looking after their mates.